3) Equilibrium in the money market occurs when
A) the quantity of money demanded equals the quantity of money supplied.
B) the quantity of money demanded is less than the quantity of money supplied.
C) the quantity of money demanded is more than the quantity of money supplied.
D) the interest rate equals the money supply.
4) If the quantity of money demanded exceeds the quantity of money supplied, then the
A) equilibrium interest rate stays the same.
B) equilibrium interest rate will increase.
C) equilibrium interest rate will decrease.
D) effect on the equilibrium interest rate is indeterminate.
5) If the quantity of money demanded is less than the quantity of money supplied, then the
A) interest rate stays the same.
B) interest rate will increase.
C) interest rate will decrease.
D) effect on the interest rate is indeterminate.
6) If the Federal Reserve conducts an open market purchase, the
A) interest rate will not change.
B) interest rate will increase.
C) interest rate will decrease.
D) money supply is decreased.
7) If the Federal Reserve conducts an open market sale, the
A) interest rate will not change.
B) interest rate will increase.
C) interest rate will decrease.
D) money supply is increased.
8) Based on the model of the money market, if prices in the economy decrease, the equilibrium
interest rate should
A) stay the same.
B) increase.
C) decrease.
D) increase to the same extent that the supply of money increases.
9) Based on the model of the money market, when real GDP increases, the equilibrium interest
rate should
A) stay the same.
B) increase.
C) decrease.
D) increase to the same extent that the supply of money increases.
10) Based on the model of the money market, when real income decreases, the equilibrium
interest rate should
A) stay the same.
B) increase.
C) decrease.
D) increase to the same extent that the supply of money increases.
11) Based on the model of the money market, if the Federal Reserve increases the reserve
requirement, the equilibrium interest rate should
A) stay the same.
B) increase.
C) decrease.
D) increase to the same extent that the demand for money increases.
12) The supply of money is determined by the Federal Reserve and is dependent on the demand
for money.
13) Interest rates will increase if the Fed conducts an open market purchase.
14) If the actual interest rate in the money market is higher than the equilibrium interest rate,
there would be an excess supply of money.
17.4 Interest Rates and How They Change Investment and Output (GDP)
1) An open market ________ by the Fed increases the money supply, which leads to ________
interest rates and increased GDP.
A) purchase; increased
B) purchase; decreased
C) sale; increased
D) sale; decreased
2) An open market ________ by the Fed decreases interest rates and ________ investment.
A) purchase; increases
B) purchase; decreases
C) sale; increases
D) sale; decreases
3) An open market purchase by the Fed
A) increases investment and increases output.
B) increases investment and decreases output.
C) decreases investment and increases output.
D) decreases investment and decreases output.
4) An open market ________ by the Fed decreases the money supply, which leads to ________
interest rates and a fall in investment spending.
A) sale; increased
B) sale; decreased
C) purchase; increased
D) purchase; decreased
5) An open market ________ by the Fed increases interest rates and ________ output.
A) sale; increases
B) sale; decreases
C) purchase; increases
D) purchase; decreases
6) An open market sale by the Fed
A) increases the money supply and increases output.
B) increases the money supply and decreases output.
C) decreases the money supply and increases output.
D) decreases the money supply and decreases output.
7) Actions by the Federal Reserve to influence the level of GDP are known as
A) monetary policy.
B) fiscal policy.
C) cyclical policy.
D) procyclical policy.
8) An increase in the reserve requirement
A) increases the money supply, which leads to increased interest rates and a decrease in GDP.
B) increases the money supply, which leads to decreased interest rates and a decrease in GDP.
C) decreases the money supply, which leads to increased interest rates and a decrease in GDP.
D) decreases the money supply, which leads to decreased interest rates and a decrease in GDP.
9) A decrease in the reserve requirement
A) increases the money supply, which leads to increased interest rates and a fall in investment
spending.
B) increases the money supply, which leads to decreased interest rates and a rise in investment
spending.
C) decreases the money supply, which leads to increased interest rates and a fall in investment
spending.
D) decreases the money supply, which leads to decreased interest rates and a rise in investment
spending.
10) If the Fed wished to decrease GDP, it could
A) increase the reserve requirement or conduct an open market sale.
B) increase the reserve requirement or conduct an open market purchase.
C) decrease the reserve requirement or conduct an open market sale.
D) decrease the reserve requirement or conduct an open market purchase.
11) If the Fed wished to decrease interest rates, it could
A) increase the reserve requirement or conduct an open market sale.
B) increase the reserve requirement or conduct an open market purchase.
C) decrease the reserve requirement or conduct an open market sale.
D) decrease the reserve requirement or conduct an open market purchase.
12) If the Fed wished to decrease inflation, it could
A) increase the reserve requirement or conduct an open market sale.
B) increase the reserve requirement or conduct an open market purchase.
C) decrease the reserve requirement or conduct an open market sale.
D) decrease the reserve requirement or conduct an open market purchase.
13) The exchange rate is
A) the rate at which banks can borrow from the Fed.
B) the slope of the investment function.
C) the price at which one currency trades for another currency.
D) the rate at which one can translate money into consumption goods.
14) Lower U.S. interest rates cause the value of the dollar to
A) rise, making U.S. goods relatively cheaper on world markets.
B) rise, making U.S. goods relatively more expensive on world markets.
C) fall, making U.S. goods relatively cheaper on world markets.
D) fall, making U.S. goods relatively more expensive on world markets.
15) Higher U.S. interest rates cause the value of the dollar to
A) rise, making U.S. goods relatively cheaper on world markets.
B) rise, making U.S. goods relatively more expensive on world markets.
C) fall, making U.S. goods relatively cheaper on world markets.
D) fall, making U.S. goods relatively more expensive on world markets.
16) An open market purchase by the Fed causes the value of the dollar to
A) rise, increasing net exports.
B) rise, reducing net exports.
C) fall, increasing net exports.
D) fall, reducing net exports.
17) An open market sale by the Fed causes the value of the dollar to
A) rise, increasing net exports.
B) rise, reducing net exports.
C) fall, increasing net exports.
D) fall, reducing net exports.
18) A rise in the value of a currency is called a(n)
A) depreciation.
B) appreciation.
C) consolation.
D) integration.
19) A decrease in the value of a currency is called a(n)
A) depreciation.
B) appreciation.
C) consolation.
D) integration.
20) The appreciation of the dollar will make U.S. goods ________ to foreigners and make
imports ________ for U.S. residents.
A) more expensive; more expensive
B) cheaper; cheaper
C) more expensive; cheaper
D) cheaper; more expensive
21) The depreciation of the dollar will make U.S. goods ________ to foreigners and make
imports ________ for U.S. residents.
A) more expensive; more expensive
B) cheaper; cheaper
C) more expensive; cheaper
D) cheaper; more expensive
22) A U.S. company that wishes to sell more to other countries would favor
A) an appreciation of the dollar.
B) a depreciation of the dollar.
C) neither an appreciation nor a depreciation of the dollar.
D) higher interest rates.
Recall the Application about the possible link between the value of the U.S. dollar and the
worldwide increase in commodity prices to answer the following question(s). Starting in the
summer of 2010, there was a rise in prices of commodities such as oil and food worldwide.
Some economists suggested that monetary policy in the United States was the cause of the
worldwide commodity boom.
23) Recall the application. Some economists noticed that the U.S. dollar ________ largely
because monetary policy in the United States had driven interest rates ________.
A) depreciated; down
B) depreciated; up
C) appreciated; down
D) appreciated; up
24) Recall the application. Some economists noticed that the change in the value of the U.S.
dollar was largely due to the change in interest rates, and the change in interest rates occurred
because of the Fed’s use of ________ to further stimulate the economy.
A) open market sales
B) quantitative easing
C) discount operations
D) open market purchases
25) Recall the application. Janet L. Yellen, the Vice-Chair of the Board of Governors, believes
that ________ in worldwide demand and ________ of supply were the primary cause of the
worldwide increase in commodity prices.
A) increases; surpluses
B) increases; shortages
C) decreases; surpluses
D) decreases; shortages
26) Recall the Application. The rise in commodity prices corresponded with ________ in interest
rates, and this change in interest rates would result in bond prices ________.
A) an increase; falling
B) an increase; rising
C) a decrease; falling
D) a decrease; rising
27) A decrease in the money supply will tend to reduce investment.
28) When the Fed increases the money supply, it leads to lower interest rates.
29) Spending on consumer durables decreases as the interest rate increases.
30) When the Fed conducts an open market sale, it leads to a higher level of investment and
output in the economy.
31) To increase the level of output, the Fed should conduct an open market sale.
32) An increase in the money supply will appreciate a country’s currency.
33) An increase in the reserve requirement will lead to increased net exports.
34) Explain what happens to the money supply, interest rates, investment spending and GDP
when the Fed makes open market bond purchases.
35) Describe the channels through which an open market purchase of bonds by the Fed affects
output in a closed economy.
36) Describe the channels through which an open market sale of bonds by the Fed affects output
in a closed economy.
37) Describe the channels through which open market purchases by the Fed affects output in an
open economy.
38) What is the “good news” and the “bad news” about a lower value of the U.S. dollar?
39) What is the “good news” and the “bad news” about a higher value of the U.S. dollar?
17.5 Monetary Policy Challenges for the Fed
1) If the current level of GDP exceeds full employment, the level of GDP can be reduced by
A) reducing taxes.
B) increasing spending.
C) reducing the money supply.
D) lowering interest rates.
2) An inside lag is
A) a lag in implementing policy.
B) the period of time it takes for policies to work.
C) a policy aimed at increasing GDP.
D) a policy aimed at reducing GDP.
3) An outside lag is
A) a lag in implementing policy.
B) the period of time it takes for policies to work.
C) a policy aimed at increasing GDP.
D) a policy aimed at reducing GDP.
4) Inside lags are
A) longer for monetary policy than for fiscal policy.
B) longer for fiscal policy than for monetary policy.
C) the same for fiscal policy and monetary policy.
D) more variable for monetary policy than for fiscal policy.
5) Outside lags occur because
A) firms must change investment plans before monetary policy can be effective.
B) it takes time to identify a problem.
C) once a problem is diagnosed, it still takes time to implement policy changes.
D) once changes are finally diagnosed and implemented, policies are immediately effective.
6) Which of the following is an example of an expectation of inflation?
A) Producers expect their prices on average to be higher next year.
B) Producers expect the prices they pay for raw materials to be higher next year.
C) Workers expect that the prices they pay for goods and services will be higher next year.
D) all of the above
7) The real rate of interest is defined as the
A) expected inflation rate minus the nominal interest rate.
B) expected inflation rate plus the nominal interest rate.
C) nominal interest rate minus the expected inflation rate.
D) nominal inflation rate plus the expected inflation rate.
8) When the expected rate of inflation is added to the real interest rate, the result is called the
A) preferred rate.
B) nominal interest rate.
C) adjustment rate.
D) differential rate.
Recall the Application about the effectiveness of committees in making decisions about
monetary policy to answer the following question(s). Former Fed vice-chairman Alan
Blinder developed an experiment to see whether individuals or groups make better
decisions, and who makes them more rapidly. The experiment tested how quickly
individuals and groups could distinguish changes in underlying trends from random
events, such as if a one-month unemployment rate increase was a temporary aberration or
the possible beginning of a recession, and their decisions as to changing monetary policy as
a reaction to the events.
9) Recall the Application. If the Federal Reserve was making a decision on changing interest
rates
A) the chairman, acting alone, would typically make a better decision than the Board of
Governors.
B) the Board of Governors would typically make a better decision than the chairman acting on
his own.
C) the Board of Governors would typically make an equally good decision as would the
chairman acting on his own.
D) neither the Board of Governors nor the chairman, acting alone, would tend to make accurate
predictions.
10) Recall the Application. The experiment conducted by Blinder showed that the actual process
of having committee meetings and discussions
A) tended to polarize the group into two distinct factions.
B) improved the group’s overall performance.
C) magnified the individual group member’s differences.
D) related to the average performance of the individual group members.
11) Recall the application. If the monthly unemployment rate increase mentioned in the
Application was a temporary aberration, the best economic decision by the committee would be
to
A) increase the money supply to stimulate the economy.
B) decrease the money supply to stimulate the economy.
C) decrease the money supply to slow the economy down.
D) not change monetary policy.
12) Recall the application. If the monthly unemployment rate increase mentioned in the
Application wound up being a permanent and not temporary change, the best economic decision
by the committee would most likely be to
A) increase the money supply to stimulate the economy.
B) decrease the money supply to stimulate the economy.
C) decrease the money supply to slow the economy down.
D) not change monetary policy.
13) The inside lags for monetary policy are relatively long compared to those for fiscal policy.
14) The outside lags related to monetary policy tend to be quite long.
15) When the public expects inflation, real and nominal rates of interest will be the same.
16) The real interest rate is the nominal interest rate plus the expected inflation rate.
17) When people expect inflation, they assume that prices are going to increase at a certain rate
and factor this into their decision making.
18) When the public expects inflation, real and nominal interest rates will differ because inflation
needs to be accounted for in calculating the real return from lending and borrowing.
19) Why might economic policies aimed at stabilization actually INCREASE the magnitudes of
economic fluctuations?
20) Explain why real and nominal rates of interest will differ when the public expects inflation.